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Since September 11, 2001, the United States has established tools to address the threat to the U.S. financial system of money laundering and terrorist financing. One such tool is Section 311 of the USA PATRIOT Act of 2001, which authorizes the Secretary of the Treasury (Treasury) to prohibit U.S. financial institutions from maintaining certain accounts for foreign banks if they involve foreign jurisdictions or institutions found to be of primary money laundering concern. To make this finding, Treasury examines several factors and generally issues a proposed rule announcing its intent to apply Section 311 restrictions. GAO was asked to examine (1) the process used to implement Section 311 restrictions, (2) the process Treasury follows to finalize or withdraw a proposed rule, and (3) how Treasury assesses the impact of Section 311. GAO reviewed financial and investigative U.S. government documents and met with government officials and representatives of affected banks.

Treasury's informal process to implement Section 311 was consistent with requirements in U.S. law. From 2002 to 2005, Treasury identified 11 cases--3 jurisdictions and 8 institutions--as being of primary money laundering concern and issued proposed rules for 10 of these cases. As required, Treasury consulted with the Departments of Justice and State prior to issuing the proposed rules. However, Justice and State officials said that it was difficult for them to effectively assess the evidence on some Section 311 cases because Treasury provided them limited time. In 2006, Treasury changed its process by forming an interagency working group to discuss potential threats to the U.S. financial system. But it is unclear if the new process addressed the agencies' concerns since Treasury has issued no Section 311 findings since 2005. Treasury determines whether to finalize or withdraw a proposed Section 311 rule by reviewing written comments and sometimes meeting with interested parties. The duration of a proposed rule is significant because U.S. financial institutions act immediately in response to its announcement. However, Treasury has taken years to complete this process in some cases. In April 2008, Treasury withdrew two of three notices--all open for between 3 and 5 years--after GAO discussed the cases with Treasury officials. Contributing to this lag was the absence of required timeframes for completing the action and of written guidance specifying a Treasury office to finalize the actions. Treasury views Section 311 as effective because it isolates target institutions from the U.S. financial system and encourages some foreign governments to strengthen their anti-money laundering authorities. However, some foreign government officials said that Section 311's implementation precluded their own enforcement or regulatory actions against targeted institutions as U.S. action was unilateral or provided too little information for them to act. Justice officials said that if Section 311's application is viewed as unsubstantiated, some countries may be less likely to cooperate with the U.S. government on other law enforcement matters or sanctions. Treasury officials recognized the concerns, but did not believe they diminished Section 311's effectiveness.

Recommendation for Executive Action

Status: Closed - Not Implemented

Comments: In response to this recommendation, Treasury circulated a memo in October 2008 from then-Under Secretary Levey to the organizations within the office of Terrorism and Financial Intelligence (TFI). According to Treasury, this memo clarified TFI's processes for combating vulnerabilities in the financial system when Section 311 is determined to be an effective tool. Treasury asserted that this memo, which also included their comments on the draft GAO report, responded directly to the report's recommendation that Treasury establish guidance specifying the responsibilities and activities of offices within Treasury for implementing and finalizing Section 311 actions. However, internally circulating Treasury's comments on our draft report does not address our recommendation. This memo contained no implementing guidance to specify the responsibilities and activities of offices within Treasury for implementing and finalizing Section 311 actions. As we reported in 2008, lacking written operational guidelines to clarify when to complete the Section 311 actions or clear lines of authority for which office is responsible for completing the action, Treasury has taken years to complete the Section 311 process for certain cases. Because a proposed rule applying Section 311 in practice has had the same effect as a final rule, Treasury may lack incentive to finalize or withdraw such rules. More expeditious completion of Section 311 cases could be an important counterbalance to concerns about the Section 311 process by affected jurisdictions, financial institutions, and other parties.

Recommendation: In order to improve implementation of the Section 311 process, the Secretary of the Treasury should establish implementing guidance for Section 311 of the USA PATRIOT Act. This guidance should specify the responsibilities and activities of offices within Treasury, including the Office of Terrorist Financing and Financial Crime and the Financial Crimes Enforcement Network, for implementing and finalizing Section 311 actions.